Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Textbook Question
Chapter 10, Problem 28SP
(Capital rationing) The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability indexes associated with them:
- a. Under strict capital rationing, which projects should be selected?
- b. What problems are there with capital rationing?
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Lane Industries is considering three independent projects, each of which requires a $2.4 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are the following:
Project H (high risk): Cost of capital = 14% IRR = 16%
Project M (medium risk): Cost of capital = 9% IRR = 7%
Project L (low risk): Cost of capital = 9% IRR = 10%
Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of $4,200,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio?
Lane Industries is considering three independent projects, each of which requires a $2.8 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here:
Project H (high risk):
Cost of capital = 12%
IRR = 14%
Project M (medium risk):
Cost of capital = 9%
IRR = 7%
Project L (low risk):
Cost of capital = 6%
IRR = 7%
Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of $3,900,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. %
Walsh Company is considering three independent projects, each of which requires a $3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented below:
Project H (High risk): Cost of capital = 16% IRR = 19% Project M (Medium risk):
Cost of capital = 13% IRR = 11% Project L (Low risk):
Cost of capital = 8% IRR = 9%
Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 30% debt and 70% common equity, and it expects to have net income of $7,268,000. The data has been collected in the Microsoft Excel Online file below
. Open the spreadsheet and perform the required analysis to answer the question below.
If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio?
Round your answer to two decimal places.
Chapter 10 Solutions
Foundations Of Finance
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